#Budget2018: Where will the R50 billion deficit come from?

CAPE TOWN - President Cyril Ramaphosa warned that “tough decisions” will have to be made i order to decrease the country’s deficit and stabilise its debt.

According to Head of of Corporate Finance at Bravura, Soria Hay said that taxes will have to be increased.

This comes after Ramaphosa, in his maiden address at the State of The Nation Address said that he will work robustly towards getting SA back on track and out of financial difficulty.

The country’s future commitments have been outlined at SONA and how this will be achieved will now be addressed in the Budget Speech, which is set to take place on Wednesday, February 21.

Hay said that Bravura hopes to see a balance in fiscal responsibility.

“It is a tightrope for the government to walk as all stakeholders have to be accounted for”.

It is also important to seed the right message, said Hay.

She added that what is also concerning is who will be delivering the speech.

Following Ramaphosa’s appointment as interim President, he has the authority to reappoint a new Cabinet.

Ramaphosa is reportedly under enormous pressure to appoint a new Cabinet. This will allegedly depict his seriousness about getting rid of corruption in the country.

Since then, there have been assumptions about Finance Minister Malusi Gigaba receiving the boot.

On the R50 billion deficit, Hay said that taxes will have to increase.

This is one manner in which the country can level the current deficit.

She also said that she hopes there will be a cut in government spending.

“The government spending on salaries is largely out of proportion, considering our country’s economic state”.

If there is a 2% VAT increase, Hay said that this may be in income tax.

“We won’t see an increase in the 28% tax”, she said.

Similarly, Chief Economist at Investec, Annabel Bishop said that Corporate tax rates are not expected to rise as they are already high, but then so are personal income taxes compared to many other peer economies.

Meanwhile, SA is expected to be rated by ratings agencies, following the Budget Speech.

“If SA is downgraded further, money will become more expensive, interest rates will go up and that will be difficult for people buying homes, cars and especially for the poor”, said Hay.

Essentially, the value of the rand will drop which means that cost of living will escalate.

Bishop said that “excessive indirect and direct tax hikes could strangle economic growth”.

According to Bishop, SA is only expected to see economic growth of around 1.5% y/y this year, and slightly higher next year as many areas of SA’s previous institutional strengths need to be repaired.

Bishop adds that the Budget will be scrutinised for cost savings, improved economic-growth-led revenue forecasts, and lower borrowings.

“The Budget is likely to be tight and tough, while expectations will be for an improved economic growth outlook (and so higher GDP growth forecasts), while fiscal consolidation is necessary in future years. Free market reforms are also necessary to support the upswing in investor sentiment since end December, and allow it to translate into faster economic growth and substantially reduced unemployment”, concludes Bishop.